• Mr H

Seeing The Woods For The Trees

There's no question that this is a topsy turvy world right now and the stock market is no different, especially if you live or invest in South Africa.



With the coronavirus delta variant raging through our country as well as many parts of the world, the president put us back into lockdown level 4 on Sunday which includes a 9pm curfew, a ban on social gatherings and a reintroduction of alcohol prohibition (the bit that most South Africans, including me, find the most painful part!).


To be honest, apart from forgetting to go to the liquor store last Thursday resulting in their being almost no alcohol in the house apart from the sweet potato flavoured gins Mrs H brought back from our trip to the UK (yuk!) , the impact on the house of H will be minimal as we never really "unlocked up" when we went back to level 1, apart from attending the odd soiree with our friends and the occasional meal out.


As I had a double round of pneumonia a couple of years back and both Mrs H and I have blood pressure on the higher side, we've been pretty careful throughout. Even though we've both had our first vaccine injections now, I don't feel anymore inclined to leave the house than in previous waves, so it's batten down the hatches with a cup of tea (in lieu of my preferred rum and coke). Besides all that, the weather is bloody awful in Cape Town right now and would freeze the nuts of a brass monkey so being in front of the fire seems like the best place to be.


However, being back home and confined to quarters has had me up to my eyes in research looking for my next investment opportunity and I'm sure you've heard the saying "You can't see the woods for the trees"? Well I have had a prime case of wood blindness that was cleared in a flash just yesterday.


You see, I have been stacking leopards for the last few months on the consulting side (Stacking leopards is the South African version of stacking Benjamins as there's a leopard on our largest bank note, the R200. I'm trying to be down with the kids!) and was working right through our UK trip and solidly since I got back so I have some outstanding invoices that will put some bank in the tank so to speak.


The stock market has been choppy at best the last few months and for some inexplicable reason, the South African Rand has strengthened massively against what is a particularly weak US Dollar right now. Check out this graph to illustrate my point:


Because most of our non-retirement stock market investments are in Rand denominated offshore investments (basically we buy offshore investments from within South Africa using Rand e.g. the Syngia S&P500 ETF or Satrix MSCI World ETF), this phenomenon has kicked the granny out of those investments over the last few months despite the fact the US market has risen significantly.


It is for this very reason, I started to look elsewhere to invest my newly found small but relevant pile of hard-earned cash. I've spent a couple of weeks looking for something new and exciting that I could get on board with and to be honest, couldn't find anything with the right risk level for my appetite. You see this is profit from within my business and I take a much lower risk with money I earned in my post-retirement business than I do with the savings we have from when we worked that isn't already locked in retirement savings. I'm trying to build the side-hustle business so that it will give us passive income through our early retirement years (from now until we're 65/70). It's been well documented here that i don't really plan to do consulting beyond 3 years and we're over a year into that.


I looked at Solar investing and there's simply no projects available right now. I've kinda gone off the cattle investing as it's just, well, a bit boring! I'm at my risk tolerance limit for cryptocurrency and everything else I looked at smelled all a bit "Ponzi". So it looked like a bond or money market fund at 8% was the answer until opportunity comes a knocking.


And then as a result of a brief email exchange asking my financial adviser if he had any bright ideas I suddenly realised I couldn't see the opportunity that was standing right in front of me!


“The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”.

That is a quote from Sir John Marks Templeton who was a prolific British investor (although born in the USA) who was famous for buying shares in companies whenever a dire global event was occurring. Most famously he bought 100 shares in every company on the New York Stock Exchange which was trading for less than $1 (104 companies, 34 of which were in bankruptcy) on the day that World War II was announced. That $1 was the equivalent of $19 today so in total he invested right around R28,000 / $2,000 / £1,400 which in today's money is not an earth shattering investment.


The portfolio grew 400% over the next 5 years that the war played out.


Using this investment philosophy, he used the money to start the Templeton Growth Fund which when he sold it in 1992, had $13,000,000,000 under management and managed to deliver a 15% annual return to investors for 38 years.


Well if it's good enough for Sir John, it's good enough for Mr H! I'll get to my point now.


The US dollar is weak right now and therefore the South African rand is strong. That means buying US stocks with South African cash is cheap right now. That was the simple and frankly bloody obvious element I had been missing. But that's not really earth shattering insight, lets face it. What starts to make this more relevant is when you look at the state of the two nations and the change that is going on within them right now. As that will give you an insight into where the value of the two currencies might go next.


And I'll put it out there right now: I'm betting that the US currency will strengthen, while the South African currency will weaken over the next 12-24 months.


My case for a strengthening dollar:


  • Government - Love or hate Donnie and his Trumponomics, it is a reasonable hypothesis that most other countries in the world would rather have Joe Biden in charge which leads to more trade which is what grows an economy.

  • Coronavirus - The US has 46.6% of its population fully vaccinated against coronavirus and yesterday had 11,427 new cases of COVID-19, down from its peak on January 8th of 305,079. They appear to have the best grip on things than they've had in the last year.

  • Stock Market - The S&P 500, the best indicator in my opinion of the US economy has grown by 37% in the last year despite being the country most impacted by COVID-19 by far when it comes to total cases. Based on cases per million of population, the US is the 15th most impacted country. 37% in that environment is pretty amazing.

  • General - The US is the richest and most economically powerful country in the world. They have consistently become more prosperous for the last 100 years with a few blips along the way.

My case for a weakening rand

  • Government - We continue to see cases of corruption running into hundreds of billions of Rand in South Africa. That money will never be recovered and the economy will be impacted as a result. Just yesterday, the former president of South Africa was given a prison sentence for contempt of court for failing to appear at a corruption investigation covering the time he was president.

  • Coronavirus - South Africa is in the midst of its third wave of coronavirus and there seems to be increased concern that the Delta strain is going to be worse than the previous two waves. South Africa has 0.8% of its population fully vaccinated.

  • Stock Market - The JSE Top 40, which is the nearest equivalent of the S&P500 in South Africa has delivered a 22% return in the last 12 months. South Africa was the 19th most impacted country by total cases and was the 94th most impacted by cases per million of population. You could argue that South Africa could have delivered better returns than the US.

  • General - South Africa is one of the 5 major emerging economies as defined by BRICS (Brazil, Russia, India, China, South Africa). South Africa's credit rating entered full junk status on March 27th 2021 after Moody's joined Fitch and Standard & Poor in downgrading South Africa to Junk status. The impact of that has not materialised fully as yet.

Now I feel like I should say at this point that this is not about SA bashing or waving the star spangled banner, I believe South Africa is slowly starting to turn around its fortunes but it's going to be a long and hard slog to get the country back in it's feet economically. I'll be part of that effort by paying my taxes, investing in the country, growing my business and who knows, I may create a few more jobs along the way. BUT in the short to medium term the debt has to be paid back, the economy has to recover and South Africa needs to weather the storm of the ongoing crisis. It's going to be tough, really tough.


And all of that means that right now, I believe the Dollar will outperform the Rand and the graph above will invert. Shortly after the start of the pandemic, the Rand was changing hands for 19.26 to the Dollar (April 6th 2020). On June 6th 2021, the Rand had strengthened a massive 30% to 13.43 to the Dollar. That's huge!


Now if I'm conservative and I guess that over the next 12 months, we'll see the rand back to the midpoint of that which is 16.35. That would equate to a 14% increase from today's price (30th June 2021) of 14.33.


So! If i'm right, and I invest in the Sygnia S&P 500 ETF today in Rand and the performance of that fund is flat. I'll make a 14% return on my investment in the next 12 months. Good right?


But the Sygnia S&P500 ETF is not going to sit still is it? In the last 12 months it delivered a return of 18%, not too shabby. And remember, that is including the losses as the Rand strengthened (remember the S&P 500 delivered 37%)


So, and stay with me here. If it was to repeat that performance this year (and remember the US is in a much better state than it was) and I'm right about the USD/ZAR price, I'll get the 14% + the 18% which is a whopping 32% return right?


Wrong


The return would actually compound so it would be (18% x 1.14) + 14% = 34.5%.......I think!


Let me quickly do it in cash to check the math.


I invest R100,000 in the ETF and it grows by 18% based on the performance of the fund giving me R118,000 at the end of the year. Plus the Dollar has strengthened against the rand by 14% increasing the end value of the investment to R134.520. That's 34,520 profit which is 34.52%.


Bingo!


So the way I see it is I could be wrong about the Rand strength, I get it. The S&P 500 might also not return 18% this year, I get that too. But based on my case above, it is more likely that the US economy will improve and more than the SA economy. That's pretty hard to argue against (and if you want to, have at it in the comments section). So even if I'm partially right, I win. If I'm wrong on one side and right on the other I win. I have to be wrong on both sides and against some fairly logical empirical evidence in the arguments above. Only then will I lose, and do you know what? I'll still win because the country I live in will have improved its economy which is good for everyone who lives here. It's a win, win win situation....... of sorts!


As always, this is not investment advice, do your own research, it's just the blethering rants of an early retiree who became a personal finance geek and blogger. I'll obviously let you know how this theory of logic and economics pans out in the coming months. I think we've found another experiment.


In the meantime, I'll be sticking my hard earned cash into the cheapest Rand denominated offshore index tracking ETFs I can find.


Until next time, keep living










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